SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A No. 1
Filed on April 17, 2002
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2001 Commission File Number 0-27937
DRAGON PHARMACEUTICAL INC.
(Exact name of Registrant as specified in its charter)
Florida 65-0142474
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1055 Hastings Street, Suite 1900
Vancouver, British Columbia V6E 2E9
(Address of Principal Executive Offices)
(604) 669-8817
(Registrant's telephone number including area code)
Securities registered under Section 12(b)of the Exchange Act: None
Securities registered under Section 12(g)of the Exchange Act: Common Stock,
par value $0.001
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the issuer was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State issuer's revenues for its most recent fiscal year: $3,073,885
The aggregate market value of the issuer's voting stock held by non-affiliates
of the issuer based upon the average bid and asked prices of such stock as of
March 15, 2002, was $27,765,375.
The number of shares outstanding of the issuer's common stock as of March 15,
2002, was 20,331,000.
Documents Incorporated By Reference: None
Item 8. Financial Statements And Supplemental Data
The following is a condensed summary of actual quarterly results of
operations for 2000 and 2001.
2000
First Second Third Fourth
----------- ----------- ----------- -------------
Revenues $ 661,785 $ 797,127 $ 739,062 $ 977,587
Gross profit 562,920 629,591 553,543 527,027
Loss before minority interest (223,869) (184,540) (425,053) (2,328,847)
Net loss (234,780) (168,997) (362,975) (1,979,042)
Loss per share $ (0.02) $ (0.01) $ (0.03) $ (0.11)
2001
First Second Third Fourth
----------- ----------- ----------- -------------
Revenues $ 664,414 $ 602,341 $ 787,682 $ 1,019,448
Gross profit 517,494 446,614 673,745 852,154
Loss before minority interest (959,743) (1,038,665) (762,706) (1,214,794)
Net loss (856,183) (972,713) (737,782) (1,168,627)
Loss per share $ (0.05) $ (0.06) $ (0.04) $ (0.07)
See pages F-1 to F-22 for our financial statements.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment Number 1 to
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: April 12, 2002 Dragon Pharmaceutical Inc.
a Florida Corporation
/s/ Longbin Liu
Longbin Liu, President
DRAGON PHARMACEUTICALS INC.
& SUBSIDIARIES
Consolidated Financial Statements
(Expressed in U.S. Dollars)
December 31, 2001 and 2000
Index
Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-1
MOORE STEPHENS ELLIS FOSTER LTD.
CHARTERED ACCOUNTANTS
1650 West 1st Avenue
Vancouver, BC Canada V6J 1G1
Telephone: (604) 734-1112 Facsimile: (604) 714-5916
E-Mail: generaldelivery@ellisfoster.bc.ca
Website: www.ellisfoster.com
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
DRAGON PHARMACEUTICALS INC.
& SUBSIDIARIES
We have audited the consolidated balance sheets of Dragon Pharmaceuticals Inc. &
Subsidiaries ("the Company") as at December 31, 2001 and 2000 and the related
consolidated statement of stockholders' equity for the years ended December 31,
2001 and 2000, and the consolidated statements of operations and cash flows for
the years ended December 31, 2001, 2000 and 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as at
December 31, 2001 and 2000 and the results of their operations and their cash
flows for the years ended December 31, 2001, 2000 and 1999 in conformity with
generally accepted accounting principles in the United States.
Vancouver, Canada "MOORE STEPHENS ELLIS FOSTER LTD."
February 28, 2002 Chartered Accountants
F-2
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------------------
ASSETS
Current
Cash and short term securities $ 9,446,084 $ 6,340,315
Accounts receivable 1,309,686 1,166,876
Inventories 1,095,860 474,041
Prepaid and deposits 140,340 96,934
- --------------------------------------------------------------------------------------------
Total current assets 11,991,970 8,078,166
Fixed assets 2,534,609 2,330,349
Investment in Hepatitis B vaccine project - related party 3,790,000 4,000,000
Refundable investment deposits - related party 372,000 372,000
Licence and permit 3,316,458 3,766,315
- --------------------------------------------------------------------------------------------
Total assets $ 22,005,037 $ 18,546,830
============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current
Bank loans $ 2,887,345 $ 2,198,280
Accounts payable and accrued liabilities 1,318,938 1,435,820
Management fees payable - related parties 234,000 -
- --------------------------------------------------------------------------------------------
Total current liabilities 4,440,283 3,634,100
- --------------------------------------------------------------------------------------------
Minority interests 688,539 929,265
- --------------------------------------------------------------------------------------------
Commitments (Note 13)
Stockholders' equity
Share capital
Authorized: 50,000,000 common shares at
par value of $0.001 each
Issued and outstanding: 20,331,000 common shares
(December 31, 2000 - 16,700,000) 20,331 16,700
Additional paid in capital 26,624,741 20,000,897
Accumulated other comprehensive (loss) (25,008) (25,588)
Accumulated deficit (9,743,849) (6,008,544)
- --------------------------------------------------------------------------------------------
Total stockholders' equity 16,876,215 13,983,465
- --------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 22,005,037 $ 18,546,830
============================================================================================
The accompanying notes are an integral part of these financial statements.
F-3
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2001 and 2000
(Expressed in U.S. Dollars)
Page 1 of 2
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Compre- other Total
Common stock Additional hensive compre- Stock-
---------------------- paid-in income Deficit hensive holders'
Shares Amount capital (loss) accumulated income equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1999 10,735,000 $ 10,735 $15,690,734 $ $(3,262,750) $ 50,049 $ 12,488,768
Issued 4,258,000
common shares
previously
allotted 4,258,000 4,258 (4,258) - - -
Additional share
issuance costs to
4,258,000 common
shares issued - (5,247) - - (5,247)
Exercise stock
options for cash 107,000 107 53,393 - - 53,500
Exercise warrants
for cash 1,600,000 1,600 2,498,400 - - 2,500,000
Allotted 250,000
common shares
at $6.25 per
share - - 1,562,500 - - 1,562,500
Stock option
compensation - - 205,375 - - 205,375
Other
comprehensive
income
- foreign
currency
translation - - - (75,637) - (75,637) (75,637)
Comprehensive
income - net
(loss) for
the year - - - (2,745,794) (2,745,794) - (2,745,794)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive
income (loss) $(2,821,431)
============
Balance,
December 31, 2000 16,700,000 $16,700 $20,000,897 $(6,008,544) $ (25,588) $ 13,983,465
======================================================== ==========================================================
The accompanying notes are an integral part of these financial statements.
F-4
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2001 and 2000
(Expressed in U.S. Dollars)
Page 2 of 2
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Compre- other Total
Common stock Additional hensive compre- Stock-
---------------------- paid-in income Deficit hensive holders'
Shares Amount capital (loss) accumulated income equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 2000 16,700,000 $ 16,700 $20,000,897 $ - $(6,008,544) $ (25,588) $ 13,983,465
Exercise of stock
options for cash 131,000 131 65,369 - - - 65,500
Issuance of
common stock
pursuant to a
private placement
at $2.00 per
share, net of
share issuance
costs of
$490,000 in
September 3,500,000 3,500 6,506,500 - - - 6,510,000
Other
comprehensive
income
- foreign
currency
translation - - - 580 - 580 580
Comprehensive
(loss) - net
(loss) for the
year - - - (3,735,305) (3,735,305) - (3,735,305)
Stock option
compensation - - 51,975 - - - 51,975
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive
(loss) $(3,734,725)
============
Balance,
December 31, 2001 20,331,000 $ 20,331 $26,624,741 $(9,743,849) $ (25,008) $ 16,876,215
======================================================== ==========================================================
The accompanying notes are an integral part of these financial statements.
F-5
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31
(Expressed in U.S. Dollars)
- -----------------------------------------------------------------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------------------------
Sales $ 3,073,885 $ 3,175,561 $ 989,539
Cost of sales 583,878 902,480 204,473
- -----------------------------------------------------------------------------------------------
Gross profit 2,490,007 2,273,081 785,066
Selling, general and
administrative expenses (5,328,110) (3,946,975) (1,239,292)
Depreciation of fixed assets and
amortization of licence and permit (597,042) (515,106) (203,394)
Net write off of land-use right and fixed assets (1,012) (257,344) -
Research expenses (105,096) (544,500) -
New market development (211,194) (279,114) -
Provision for doubtful debts (267,300) (63,630) (5,033)
Loan interest expense (154,644) (102,268) (326,623)
Stock-based compensation (51,975) (205,375) (1,876,000)
- -----------------------------------------------------------------------------------------------
Operating loss (4,226,366) (3,641,231) (2,865,276)
Interest income 250,458 478,922 19,397
- -----------------------------------------------------------------------------------------------
Loss before minority interest (3,975,908) (3,162,309) (2,845,879)
Minority interest 240,603 416,515 54,846
- -----------------------------------------------------------------------------------------------
Net (loss) for the year $ (3,735,305) $ (2,745,794) $(2,791,033)
===============================================================================================
(Loss) per share
Basic and diluted $ (0.21) $ (0.17) $ (0.27)
===============================================================================================
Weighted average number of
common shares outstanding
Basic and diluted 17,810,411 15,794,871 10,177,452
===============================================================================================
The accompanying notes are an integral part of these financial statements.
F-6
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31
(Expressed in U.S. Dollars)
- ------------------------------------------------------------------------------------------------------------
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------
Cash flows from (used in) operating activities
Net (loss) for the year $ (3,735,305) $ (2,745,794) $ (2,791,033)
Adjustments to reconcile net loss to
net cash used in operating activities:
- loan bonuses - - 283,365
- stock-based compensation expense 51,975 205,375 1,876,000
- depreciation of fixed assets and
amortization of licence and permit 597,042 669,031 263,101
- minority interests (240,603) (416,515) (54,846)
- loss on disposal of fixed assets - - 12,279
- net write off of land-use right and fixed assets 1,012 257,344 -
- provision for doubtful debts 267,300 63,630 5,033
Changes in non-cash working capital items:
- accounts receivable (200,110) (561,763) (662,999)
- inventories (621,819) 183,925 (385,436)
- prepaid expenses and deposits (43,406) 362,006 (266,169)
- accounts payable and accrued liabilities (116,882) 98,112 902,328
- management fees payable - related parties 234,000 - -
- ------------------------------------------------------------------------------------------------------------
(3,806,796) (1,884,649) (818,377)
- ------------------------------------------------------------------------------------------------------------
Cash flows used in investing activities
Purchase of fixed assets (352,069) (900,231) (339,504)
Increase in restricted funds (892,342) (2,247,613) -
Additional cost of licence - (250,000) -
Acquisition of Huaxin, net of cash acquired - - (2,931,818)
Investment in Hepatitis B vaccine project - (4,000,000) -
Refundable investment deposits - (400,000) -
- ------------------------------------------------------------------------------------------------------------
(1,244,411) (7,797,844) (3,271,322)
- ------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Loan proceeds 689,065 1,594,453 613,497
Proceeds from issuance of shares,
net of issuance costs 6,575,500 2,553,500 1,389,212
Proceeds from shares subscribed and allotted
in prior period, net of issuance costs - 8,611,603 1,325,000
Funds contributed by minority shareholders - 403,380 -
- ------------------------------------------------------------------------------------------------------------
7,264,565 13,162,936 3,327,709
- ------------------------------------------------------------------------------------------------------------
Foreign exchange (gain) loss on cash
held in foreign currency 69 (5,003) (1,103)
- ------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and
and cash equivalents 2,213,427 3,475,440 (763,093)
Cash and cash equivalents, beginning of year 4,092,702 617,262 1,380,355
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 6,306,129 $ 4,092,702 $ 617,262
============================================================================================================
The accompanying notes are an integral part of these financial statements.
F-7
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
1. Nature of Business
The Company was formed on August 22, 1989 as First Geneva Investments Inc.
under the laws of the State of Florida. The Company changed its name to
Dragon Pharmaceuticals Inc. on August 31, 1998. Pursuant to a share
exchange agreement, dated July 29, 1998, the Company acquired 100% of the
issued and outstanding shares of Allwin Newtech Ltd. ("Allwin") by issuing
7,000,000 common shares of the Company. This transaction is accounted for
as a reverse acquisition.
Allwin was incorporated under the laws of British Virgin Islands on
February 10, 1998. Pursuant to a Sino-Foreign Co-operative Company
Contract, dated April 18, 1998, Allwin and a Chinese corporation formed a
limited liability company under the Chinese law, named as Sanhe Kailong
Bio-pharmaceutical Co., Ltd. ("Kailong"), located in Hebei Province, China.
Allwin has a 95% interest in Kailong. Pursuant to another Sino-foreign
Co-operative Company Contract, dated July 27, 1999, Allwin completed the
acquisition of a 75% interest in Nanjing Huaxin Bio-pharmaceutical Co. Ltd.
("Huaxin"). Kailong is inactive and Huaxin is in the business of research
and development, production and sales of pharmaceutical products in China.
Allwin Biotrade Inc. ("Biotrade) was incorporated under the laws of British
Virgin Islands on June 6, 2000 for the purpose of marketing and
distributing biopharmaceutical products outside China. Dragon
Pharmaceuticals (Canada) Inc. ("Dragon Canada") was incorporated in British
Columbia, Canada on September 15, 2000 for the purpose of researching and
developing new biopharmaceutical products.
2. Significant Accounting Policies
(a) Basis of Consolidation
(i) These consolidated financial statements include the accounts of
the Company and its subsidiaries, Allwin, Kailong, Huaxin,
Biotrade and Dragon Canada. All inter-company transactions and
balances have been eliminated.
(ii) Under the terms of Sino-Foreign Joint Venture Contract, Huaxin's
board of directors consists of five directors of which the
Company has the right to select three directors including the
chairman. Except for (1) amending Huaxin's articles of
association; (2) liquidating Huaxin; (3) increasing or decreasing
Huaxin's registered capital; (4) mortgaging Huaxin's assets; and
(5) merging Huaxin, which transactions require unanimous approval
by Huaxin's board, the Company controls Huaxin in the ordinary
course of business. Because the Company has a controlling
financial interest in Huaxin, and controls Huaxin's operations in
the ordinary course of business, the Company has accounted for
Huaxin using the consolidated method of accounting as opposed to
using the equity method.
F-8
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
2. Significant Accounting Policies (continued)
(b) Principles of Accounting
These financial statements are stated in US Dollars and have been
prepared in accordance with accounting principles generally accepted
in the United States.
(c) Fixed Assets
Depreciation is based on the estimated useful lives of the assets and
is computed using the straight-line method. Fixed assets are recorded
at cost. Depreciation is provided over the following useful lives:
Motor vehicle 10 years
Lab equipment 8 years
Office equipment and furniture 5 years
Production equipment 10 years
Leasehold improvements Term of lease (10 years)
(d) Foreign Currency Transactions
The parent company, Allwin, Kailong, Huaxin, Biotrade and Dragon
Canada maintain their accounting records in their functional
currencies (i.e., U.S. dollars, U.S. dollars, Renminbi Yuan, Renminbi
Yuan, U.S. dollars and Canadian dollars respectively). They translate
foreign currency transactions into their functional currency in the
following manner.
At the transaction date, each asset, liability, revenue and expense is
translated into the functional currency by the use of the exchange
rate in effect at that date. At the period end, monetary assets and
liabilities are translated into the functional currency by using the
exchange rate in effect at that date. The resulting foreign exchange
gains and losses are included in operations.
(e) Foreign Currency Translations
Assets and liabilities of the foreign subsidiaries (whose functional
currency is Renminbi Yuan or Canadian dollars) are translated into
U.S. dollars at exchange rates in effect at the balance sheet date.
Revenue and expenses are translated at average exchange rate. Gain and
losses from such translations are included in stockholders' equity, as
a component of other comprehensive income.
F-9
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
2. Significant Accounting Policies (continued)
(f) Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(g) Advertising Expenses
The Company expenses advertising costs as incurred. There were no
advertising expenses incurred by the Company during the years ended
December 31, 2001, 2000 and 1999.
(h) Income Taxes
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes", which requires the
Company to recognize deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized
in the Company's financial statements or tax returns using the
liability method. Under this method, deferred tax liabilities and
assets are determined based on the temporary differences between the
financial statements and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are
expected to reverse.
(i) Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. The
Company is disclosing this information on its Statement of
Stockholders' Equity. Comprehensive income comprises equity except
those resulting from investments by owners and distributions to
owners. SFAS No. 130 did not change the current accounting treatments
for components of comprehensive income.
F-10
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
2. Significant Accounting Policies (continued)
(j) Financial Instruments and Concentration of Risks
Fair value of financial instruments are made at a specific point in
time, based on relevant information about financial markets and
specific financial instruments. As these estimates are subjective in
nature, involving uncertainties and matters of significant judgement,
they cannot be determined with precision. Changes in assumptions can
significantly affect estimated fair values.
The carrying value of cash and cash equivalents, term deposits,
accounts receivable, bank loans, accounts payable and accrued
liabilities approximate their fair value because of the short-term
nature of these instruments. The Company places its cash and cash
equivalents with high credit quality financial institutions. The
Company routinely maintains balances in a financial institution beyond
the insured amount. As of December 31, 2001, the Company had deposits
of $1,151,000 above insured limits. As of December 31, 2000, the
Company had no deposits in a bank beyond insured limits.
The Company is operating in China, which may give rise to significant
foreign currency risks from fluctuations and the degree of volatility
of foreign exchange rates between U.S. dollars and the Chinese
currency RMB. Financial instruments that potentially subject the
Company to concentration of credit risk consist principally of cash
and trade receivables, the balances of which are stated on the balance
sheet. The Company places its cash in high credit quality financial
institutions. Concentration of credit risk with respect to trade
receivables are limited due to the Company's' large number of diverse
customers in different locations in China. The Company does not
require collateral or other security to support financial instruments
subject to credit risk.
(k) Licence and Permit
Licence and permit, in relation to the production and sales of
pharmaceutical products in China, is amortized on a straight-line
basis over ten years.
The carrying value of licence and permit is reviewed by management at
least annually and impairment losses, if any, are recognized when the
expected non-discounted future operating cash flows derived from the
related product licence acquired are less than the carrying value of
such licence and permit. In the event of an impairment in the value of
the licence and permit, the discounted cash flows method is used to
arrive at the estimated fair value of such licence and permit.
F-11
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
2. Significant Accounting Policies (continued)
(l) Cash and Cash Equivalents
Cash equivalents usually consist of highly liquid investments which
are readily convertible into cash with maturities of three months or
less. As at December 31, 2001, cash equivalents consist of commercial
papers and redeemable term deposits.
(m) Inventories
Inventories are stated at the lower of cost and replacement cost with
respect to raw materials and the lower of cost and net realizable
value with respect to finished goods. Cost includes direct material,
direct labour and overheads. Cost is calculated using the first-in,
first-out method. Net realizable value represents the anticipated
selling price less further costs for completion and distribution.
(n) Revenue Recognition
Sales revenue is recognized upon the delivery of goods to customers.
(o) Stock-based Compensation
The Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-based Compensation". SFAS 123 encourages, but does not require,
companies to adopt a fair value based method for determining expense
related to stock-based compensation. The Company continues to account
for stock-based compensation issued to employees and directors using
the intrinsic value method as prescribed under Accounting Principles
Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees"
and related Interpretations.
(p) Loss Per Share
Loss per share is computed using the weighted average number of shares
outstanding during the period. The Company adopted SFAS No. 128,
"Earnings per share". Diluted loss per share is equal to the basic
loss per share because common stock equivalents consisting of options
to acquire 2,969,500 common shares and warrants to acquire 2,200,000
common shares that are outstanding at December 31, 2001 are
anti-dilutive, however, they may be dilutive in future.
F-12
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
2. Significant Accounting Policies (continued)
(q) New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 141 (SFAS 141),
Business Combinations. SFAS 141 applies to all business combinations
initiated after June 30, 2001. The SFAS 141 applies to all business
combinations accounted for using the purchase method for which the
date of acquisition is July 1, 2001, or later. The adoption of SFAS
141 will not have an impact on the Company's financial statements.
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 142 (SFAS 142),
Goodwill and Other Intangible Assets. The provisions of SFAS 142 are
required to be applied starting with fiscal years beginning after
December 15, 2001 with earlier application permitted for entities with
fiscal years beginning after March 15, 2001 provided that the first
interim financial statements have not been previously issued. The
Statement is required to be applied at the beginning of the entity's
fiscal year and to be applied to all goodwill and other intangible
assets recognized in its financial statements to that date. The
adoption of SFAS 142 will not have an impact on the Company's
financial statements.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 143 (SFAS 143), Asset
Retirement Obligations. SFAS 143 establishes accounting standards for
recognition and measurement of a liability for the costs of assets
retirement obligations. Under SFAS 143, the costs of retiring an asset
will be recorded as a liability when the retirement obligation arises
and will be amortized to expense over the life of the asset. The
adoption of SFAS 143 will not have an impact on the Company's
financial statements.
In October, 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144 (SFAS 144),
Accounting for the Impairment or Disposal of Long-lived Assets. SFAS
144 supersedes SFAS 121, Accounting for the Impairment of Long-lived
Assets and Long-lived Assets to be Disposed Of, and APB Opinion 30,
Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for segments of a
business to be disposed of. SFAS 144 is effective for fiscal years
beginning after December 15, 2001. The adoption of SFAS 144 will not
have an impact on the Company's financial statements
F-13
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
3. Restricted Funds
---------------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------------
Term deposits held as
collateral against bank loans $3,139,955 $1,736,328
Cash for use in acquisition
of fixed assets - 511,285
---------------------------------------------------------------------------
Restricted funds 3,139,955 2,247,613
Cash and cash equivalents 6,306,129 4,092,702
---------------------------------------------------------------------------
Cash and short term securities $9,446,084 $6,340,315
===========================================================================
4. Accounts Receivable
---------------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------------
Trade receivable $1,225,455 $996,100
Allowance for doubtful accounts (97,982) (40,663)
---------------------------------------------------------------------------
1,127,473 955,437
Other receivable 182,213 211,439
---------------------------------------------------------------------------
$1,309,686 $1,166,876
===========================================================================
5. Inventories
---------------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------------
Raw materials $ 173,687 $ 72,033
Finished goods 179,871 391,469
Work in progress 742,302 10,539
---------------------------------------------------------------------------
$1,095,860 $ 474,041
===========================================================================
F-14
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
6. Fixed Assets
---------------------------------------------------------------------------
2001
------------------------------------------
Accumulated Net book
Cost depreciation value
---------------------------------------------------------------------------
Motor vehicles $ 100,329 $ 31,657 $ 68,672
Office equipment and furniture 267,104 85,935 181,169
Leasehold improvements 990,940 221,652 769,288
Production and lab equipment 2,020,137 504,657 1,515,480
---------------------------------------------------------------------------
$3,378,510 $ 843,901 $ 2,534,609
===========================================================================
---------------------------------------------------------------------------
2000
------------------------------------------
Accumulated Net book
Cost depreciation value
---------------------------------------------------------------------------
Motor vehicles $ 100,309 $ 15,752 $ 84,557
Office equipment and furniture 202,242 57,746 144,496
Leasehold improvements 952,364 119,234 833,130
Production and lab equipment 1,598,360 330,194 1,268,166
---------------------------------------------------------------------------
$2,853,275 $522,926 $2,330,349
===========================================================================
Depreciation expense for the years ended December 31, 2001, 2000 and 1999
was $344,614, $269,125 and 130,835, respectively. The majority of fixed
assets are located in China.
7. Investment in Hepatitis B Vaccine Project - Related Party
---------------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------------
Hepatitis B Vaccine Project $4,000,000 $4,000,000
Less: Valuation allowance (210,000) -
---------------------------------------------------------------------------
$3,790,000 $4,000,000
===========================================================================
(a) Pursuant to an agreement dated October 6, 2000, the Company paid
$4,000,000 for the acquisition of certain assets and technology
relating to the production of Hepatitis B vaccine. The vendor of the
transaction is a company named Alphatech Bioengineering Limited,
incorporated in Hong Kong, and one of the two shareholders of which is
a director and senior officer of the Company.
F-15
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
7. Investment in Hepatitis B Vaccine Project - Related Party (continued)
(b) Pursuant to an amended agreement dated June 5, 2001, in the event that
the Company failed to find a joint venture partner, establish a
production facility for the vaccine project or sell the project to a
third party within nine months from the date of this amended
agreement, Dr. Longbin Liu, a senior officer and director of the
Company and one of the shareholders of Alphatech, demands to
repurchase the project from the Company. The repurchase price will be
$4.0 million payable as follows:
(i) $500,000 at the date of repurchase; and
(ii) the balance to be paid within eighteen (18) months of the date of
repurchase with interest at 6% per annum. The interest will be
accrued from six months after the date of repurchase.
8. Refundable Investment deposits - Related Party
---------------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------------
Guanzhou Recomgen Biotech Co. Ltd.
- Tissue Plasminogen Activator
("TPA") Project $400,000 $400,000
Less: Valuation allowance (28,000) (28,000)
---------------------------------------------------------------------------
$372,000 $372,000
===========================================================================
During the year 2000, the Company paid $400,000 to Guanzhou Recomgen
Biotech Co. Ltd. ("Guanzhou Recomgen"), a company incorporated in China,
for the funding of its TPA research and development programs with the
intention of acquiring the technology. Guanzhou Recomgen is controlled by a
senior officer and a director of the Company. Subsequent to the year-end,
due to financial market and economic conditions, the Company decided not to
proceed with the funding and the acquisition. In accordance with the
agreement, Guanzhou Recomgen and its principals agreed to refund the
$400,000 before September 30, 2001. The $400,000 was repaid subsequent to
December 31, 2001.
F-16
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
9. Bank Loans
---------------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------------
RMB 3,000,000, bearing interest at 5.85%
per annum and due on July 31, 2001 $ $ 362,354
RMB 2,000,000, bearing interest at 5.85%
per annum and due on August 15, 2001 - 241,570
RMB 7,800,000, bearing interest at 5.265%
per annum and due on January 31, 2002.
(Renewed subsequent to year end.) The loan
is secured by the term deposit. 942,312 942,120
RMB 4,000,000, bearing interest at 5.265%
per annum and due on August 20, 2002.
The loan is secured by the term deposit. 483,238 483,138
RMB 1,400,000 bearing interest at 5.265%
per annum and due on July 26, 2002. The
loan is secured by the term deposit. 169,133 169,098
RMB 2,300,000 bearing interest at 5.265%
per annum and due on January 18, 2002.
(Repaid subsequent to year end.) The loan
is secured by the term deposit. 277,862 -
RMB 3,150,000 bearing interest at 5.265%
per annum and due on April 4, 2002.
The loan is secured by the term deposit. 380,550 -
RMB 3,700,000 bearing interest at 5.265%
per annum and due on June 19, 2002.
The loan is secured by the term deposit. 446,995 -
RMB 1,555,000 bearing interest at 5.022%
per annum and due on January 31, 2002.
(Renewed subsequent to year end.) The
loan is secured by the term deposit. 187,255 -
---------------------------------------------------------------------------
Total $2,887,345 $2,198,280
===========================================================================
The weighted average interest rate was 5.249%, 5.79% and 5.85% for the
years ended December 31, 2001, 2000 and 1999, respectively.
F-17
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
10. Income Taxes
(a) Kailong and Huaxin are subject to income taxes in China on its taxable
income as reported in its statutory accounts at a tax rate in
accordance with the relevant income tax laws applicable to
Sino-foreign equity joint venture enterprises. However, pursuant to
the same income tax laws, Kailong and Huaxin are fully exempt from
income tax for five years starting from their first profit-making year
followed by a 15% corporation tax rate for the next three years.
Allwin is not subject to income taxes.
As at December 31, 2001, the parent company, Kailong and Huaxin have
estimated losses, for tax purposes, totalling approximately
$5,440,000, which may be applied against future taxable income.
Accordingly, there is no tax expense charged to the Statement of
Operations for the years ended December 31, 2001, 2000 and 1999. The
potential tax benefits arising from these losses have not been
recorded in the financial statements. The Company evaluates its
valuation allowance requirements on an annual basis based on projected
future operations. When circumstances change and this causes a change
in management's judgement about the realizability of deferred tax
assets, the impact of the change on the valuation allowance is
generally reflected in current income.
(b) The tax effect of temporary differences that give rise to the Company's
deferred tax asset (liability) are as follows:
---------------------------------------------------------------------------
2001 2000 2002
---------------------------------------------------------------------------
Tax losses carried forward 1,850,000 $ 776,560 $ 361,000
Stock-based compensation 17,700 70,000 638,000
Less: valuation allowance (1,867,700) (846,560) (999,000)
---------------------------------------------------------------------------
$ - $ - $ -
===========================================================================
A reconciliation of the federal statutory income tax to the Company's
effective income tax rate is as follows:
---------------------------------------------------------------------------
2001 2000 2002
---------------------------------------------------------------------------
Federal statutory income tax rate 34% 34% 34%
Change in valuation allowance (34%) (34%) (34%)
---------------------------------------------------------------------------
Effective income tax rate - - -
===========================================================================
F-18
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
11. Stock Options and Warrants
(a) Stock Options Plans
The Company charged $51,975, $205,375 and $1,816,000, for the years
ended December 31, 2001, 2000 and 1999, respectively, to income due to
the exercise price of the vested options granted being below fair
value of the Company's stock on the date of the grant. During the year
ended December 31, 2001, there were options granted entitling the
option holders to acquire 20,000 shares at a price of $1.80 expiring
November 30, 2001, 125,000 shares at a price of $1.80 per share
expiring May 31, 2006 and 50,000 shares at a price of $1.75 per share
expiring December 18, 2006.
The following is a summary of the employee stock option information
for the period ended December 31, 2001:
---------------------------------------------------------------------------
Weighted Average
Shares Exercise Price
---------------------------------------------------------------------------
Options outstanding at December 31, 1999 1,520,000 $ 0.58
Granted 1,737,500 $ 3.31
Forfeited (107,500) $ 7.00
Exercised (107,000) $ 0.50
---------------------------------------------------------------------------
Options outstanding at December 31, 2000 3,043,000 $ 1.89
Granted 195,000 $ 1.79
Forfeited (137,500) $ 2.93
Exercised (131,000) $ 0.50
---------------------------------------------------------------------------
Options outstanding at December 31, 2001 2,969,500 $ 1.92
===========================================================================
Options Outstanding Options Exercisable
----------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
----------------------------------------------------- -------------------------
$0.01 - $1.00 1,257,000 2.29 $ 0.50 1,243,000 $ 0.50
$1.01 - $2.00 175,000 4.57 $ 1.79 175,000 $ 1.79
$2.01 - $3.00 60,000 2.86 $ 2.50 60,000 $ 2.50
$3.01 - $4.00 1,477,500 3.85 $ 3.13 1,477,500 $ 3.13
---------- -------- -------- ------------- ---------
2,969,500 3.21 $ 1.92 2,955,500 $ 1.93
========== ======== ======== ============= =========
F-19
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
11. Stock Options and Warrants (continued)
The Company accounts for its stock-based compensation plan in accordance
with APB Opinion No. 25, under which no compensation is recognized in
connection with options granted to employees except if options are granted
with a strike price below fair value of the underlying stock. The Company
adopted the disclosure requirements SFAS No. 123, Accounting for
Stock-Based Compensation. Accordingly, the Company is required to calculate
and present the pro forma effect of all awards granted. For disclosure
purposes, the fair value of each option granted to an employee has been
estimated as of the date of grant using the Black-Scholes option pricing
model with the following assumptions: risk-free interest rate of 5.5%,
dividend yield 0%, volatility of 89%, and expected lives of approximately 0
to 5 years. Based on the computed option values and the number of the
options issued, had the Company recognized compensation expense, the
following would have been its effect on the Company's net loss:
---------------------------------------------------------------------------
2001 2000 1999
---------------------------------------------------------------------------
Net (loss) for the year:
- as reported $(3,735,305) $(2,745,794) $(2,791,033)
- pro-forma $(3,735,889) (2,746,378) (2,791,033)
---------------------------------------------------------------------------
Basic and diluted (loss)
per share:
- as reported $ (0.21) $ (0.17) $ (0.27)
- pro-forma $ (0.21) $ (0.17) $ (0.27)
---------------------------------------------------------------------------
(b) Warrants
Share purchase warrants outstanding as at December 31, 2001:
Number Underlying Exercise Price
of Warrants Shares Per Share Expiry Date
----------- ----------- -------------- ------------------
400,000 400,000 $3.00 November 24, 2002
3,500,000 1,750,000 $2.00 September 13, 2003
50,000 50,000 $1.70 November 15, 2004
F20
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
12. Related Party Transactions
(a) The Company incurred the following expenses to two directors of the
Company:
----------------------------------------------------------------------
2001 2000 1999
----------------------------------------------------------------------
Management fees $ 336,000 $ 72,000 $ 96,000
======================================================================
b) see Notes 7,8 and 15.
13. Commitments
The Company has entered into operating lease agreements with respect to
Huaxin's production plant in Nanjing, China for an amount of RMB 2,700,000
(US$326,000) per annum until June 11, 2009, and the Company's
administrative offices in Vancouver for an amount escalating from
CDN$200,000 to CDN$230,000 (US$126,000 to US$145,000) per annum until March
31, 2007. Minimum payments required under the agreements are as follows:
2002 $ 430,913
2003 452,351
2004 467,062
2005 468,143
2006 471,384
2007 - 2009 833,671
-------------------------------
Total US $3,123,524
-------------------------------
14. Comparative Figures
Certain 2000 comparative figures have been reclassified to conform to the
financial statement presentation adopted for 2001.
F-21
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
15. Subsequent Events
Subsequent to December 31, 2001, the Company
(a) entered into a Project Development Agreement with the President and
Chief Executive Officer of the Company (the "President") to continue
the research and development of G-CSF and Insulin for the Company. The
Company will make payment for the development of G-CSF as follows:
(i) US$500,000 to be provided at the commencement of the research in
the G-CSF Project;
(ii) US$500,000 to be provided when cell-line and related technology
is established and animal experimentation commences in the G-CSF
Project; and
(iii)US$300,000 to be provided when a permit for clinical trials for
G-CSF has been issued by the State Drug Administration of China
("SDA"); and
(iv) US$200,000 to be provided when a new drug license for G-CSF is
issued to Dragon by the SDA.
(v) US$500,000 to be paid as a bonus if the SDA issues the new drug
license for G-CSF to Dragon before January 14, 2004.
The Company will make payment for the development of Insulin as
follows:
(i) US$750,000 to be provided by at the commencement of the research
in the Insulin Project;
(ii) US$750,000 to be provided when cell-line and related technology
is established and animal experimentation commences in the
Insulin Project;
(iii)US$300,000 to be provided when a permit for clinical trials for
Insulin has been issued by the SDA; and
(iv) US$200,000 to be provided when a new drug license for Insulin is
issued to Dragon by the SDA.
(v) US$500,000 to be paid as a bonus if the SDA issues the new drug
license for Insulin to Dragon before January 14, 2004.
F-22
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
15. Subsequent Events (continued)
For both the G-CSF and Insulin Projects:
(i) If the Company elects to cease development of the project it will
forfeit any payments made and lose ownership of the Project, but
it will not be obligated to make any further payments toward the
Project;
(ii) if an application for permit for clinical trials is not submitted
within three years with respect to the G-CSF Project by or four
years with respect to the Insulin Project or if the SDA rejects
the Project for technical or scientific reasons or If development
of the Project is terminated by the President, then the President
will refund to the Company all amounts paid, without interest or
deduction, with respect to the Project with in six months
(b) entered into a Patent Development Agreement with the President and a
company controlled by the President entitling the Company to acquire
one patent filed in the United States related to the discovery of a
new gene or protein. Consideration for the right to acquire the patent
Is payment of US$500,000 and the issuance of warrants to acquire
1,000,000 common shares of the Company at a price of $2.50 per share
for a period of five years. The patent may be acquired prior to
January 14, 2005 at no additional cost other than the reasonable legal
costs of obtaining the patent.
(c) acquired the balance of the outstanding shares of Huaxin for
$1,400,000.